American Express Has Room to Move

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Dow component American Express (AXP) reports its fourth-quarter earnings on Thursday evening, and not a moment too soon, because the financial giant faces a huge challenge in 2012. While the economy grows at a painfully slow pace, competitors Visa (V) and MasterCard (MA) are enticing customers away with cheaper ways to process credit cards and organize business records.

The competition turns big profits on debit cards while their credit-card operations are stuck in the mud. American Express has no debit operations and is forced to build revenue with a high-end customer base in a more challenging regulatory environment. In addition, it provides direct credit from its own coffers, while Visa and MasterCard take transaction fees and force their banking partners to assume credit risk.

American Express has a great way to make money during periods of high demand, low default and big spreads between loan wholesale costs and retail rates. But none of those positive factors are in play during this underwhelming post-credit-collapse economic cycle.

The stock topped out near $12 (post-split) a few months before the 1987 crash and fell into a trading range (blue line) that lasted for eight years. It finally broke out in the summer of 1995 and posted fabulous gains for the next five years, hitting $55 in October 2000. Price then turned south with the broad market, losing more than half of its value before bottoming out in late 2001.

A two-year basing pattern (red circle) gave way to a secondary uptrend that pushed over the 2000 high (red line) in 2006. The stock spent more than a year at that lofty level, building a topping pattern that broke to the downside in late 2007. The furious decline that followed undercut the 2001 low, dragging price to a 13-year low in early 2009.

The subsequent bounce recovered 78.6% of the bear market downtrend, with the uptick peaking at $54 in July of last year. You'll note that that's less than 2 points from the 2000 high. Price has spent the last six months grinding sideways in a broad holding pattern, while market players wonder if the recent economic upturn will build company profits beyond modest expectations.

The weekly pattern shows an eight-month V-shaped bounce off the 2009 low, followed by two price clusters (red boxes) that roughly correspond to 2010 and 2011 trading, respectively. The sideways patterns sit on top of the 50-week EMA, which continues to offer strong support. Through it all, the stock has gained just 12 points and remains vulnerable to more whipsaws.

We can draw a rising channel (blue lines) lines around those clusters, which now define the languid pace of price appreciation. The stock is currently trading near the dead center of this pattern, in narrow-range action that could radically change after Thursday's confessional. For now, there isn't much for sidelined players to do, and I certainly don't recommend an early entry.

The rising channel opens the door to a post-earnings buying spike that tests, and marginally exceeds, the October high at $52.35. That positive price action would bring the more important 78.6% retracement and 2000 high near $55 back into play, with a channel breakout setting the stage for a greater rally impulse up to the all-time high in the mid-$60s.

The daily pattern is chaotic: The stock had a selloff from the July high, followed by months of seesaw action that has gone absolutely nowhere. It's bullish that accumulation, as measured by on-balance volume (OBV), has remained strong through the whipsaws, telling us that institutions are hanging tough, hoping that price will eventually lift out of the trading range and test new highs.

Heading into earnings, pay attention to the red trendlines formed by the lower highs and higher lows. A push across either line will shift price out of neutral and support a larger scale trend, higher or lower. With the stock holding firm at the 200-day EMA, as well as a resilient January market, I'll keep my focus on the upside, looking for a breakout into the mid-$50s.

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